Did Virginia allow a 2009 net operating loss caused by theft to be carried back three years to a 2006 individual return?

Subject

Net Operating Loss Deductions Arising from Casualty or Theft

Plain-English summary

Virginia allowed the taxpayer's 2009 theft-loss net operating loss to be carried back three years to 2006. The Department had denied the amended return after treating the loss as subject to a two-year carryback, but the Commissioner distinguished the historical federal theft-and-casualty rule.

Virginia started individual taxable-income computations from federal adjusted gross income and generally followed federal NOL carryback periods. Under the federal provisions discussed in this 2015 ruling, a general NOL carried back two years, while the portion of an individual's NOL arising from casualty or theft carried back three years.

Virginia had rejected a different federal election that allowed certain 2008 and 2009 NOLs to use elective three-, four-, or five-year carrybacks. The Commissioner concluded that this Virginia exception did not displace the separate three-year period specifically provided for casualty or theft losses.

Result: the 2006 amended Virginia return was to be processed as filed, with a refund and applicable interest after review.

What this means for you

• NOL character can determine the applicable carryback period under the law for the loss year.
• A state's exception to one federal carryback election does not necessarily eliminate a separate category-specific rule.
• Preserve federal audit, refund, and loss records supporting the nature and amount of the NOL.
• These were 2006-2009 rules; current federal and Virginia NOL law must be checked independently.

Common questions

Q: What created the NOL?

A: Eligible theft losses realized in 2009.

Q: Why did the loss reach 2006?

A: The historical federal rule allowed the theft-loss portion of an individual's NOL to carry back three years, and Virginia followed that period.

Q: What relief was ordered?

A: Processing of the 2006 amended return and issuance of any refund with applicable interest.

Citations and references

• Va. Code § 58.1-301.
• IRC § 172(b)(1)(A), (F), (H), and § 172(b)(3), as applicable to the historical tax years.
• 23 VAC 10-110-84.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 15-233

Original ruling text

December 16, 2015

Re: Net Operating Loss Deductions Arising from Casualty or Theft

Dear *:

This will reply to your letter appealing the denial of your Taxable Year 2006 amended Virginia return, which was submitted with a net operating loss deduction ("NOLD") carryback.

FACTS

In Taxable Year 2009, you ("the Taxpayer") realized eligible theft losses that qualified as a federal NOLD. The Taxpayer timely filed amended federal and Virginia individual income tax returns for Taxable Years 2006 and 2007, reporting the NOLD carryback.

The Internal Revenue Service ("IRS") initially delayed processing the Taxpayer's amended federal returns pending further examination. After the Taxpayer provided additional information to the IRS, adjustments were made to the amended federal returns and refunds were issued in September, 2011.

Under review, the Department of Taxation ("the Department") denied the Taxpayer's amended Virginia return for Taxable Year 2006 because the carryback period for the Taxpayer's 2009 NOLD exceeded two years. The Taxpayer appealed the Department's determination, asserting that he is entitled to carryback the 2009 NOLD for three years for Virginia income tax purposes because such NOLD arose from theft and Virginia conforms to the federal provision that retains a three-year carryback period for NOLDs arising from casualty or theft.

DETERMINATION

Virginia income tax laws do not address the computation or application of NOLDs. Nonetheless, Va. Code § 58.1-301 provides that the terminology and references used in Title 58.1 of the Code of Virginia have the same meaning as provided in the Internal Revenue Code ("IRC"), with certain exceptions unless a different meaning is clearly required. For individual income tax purposes, Virginia clearly "conforms" to federal income tax law in that it starts the computation of Virginia Taxable Income with federal adjusted gross income ("FAGI").

Under IRC § 172(b)(1)(A), a NOLD generally may be carried back two years and carried forward twenty years. However, under IRC § 172(b)(1)(F), the portion of an individual's NOLD arising from casualty or theft may be carried back three years and carried forward twenty years. Taxpayers may elect to forego the NOLD carryback pursuant to IRC § 172(b)(3). Unless such an election is made, the NOLD must first be carried back to the earliest of the carryback years. The resulting NOLD, to the extent it exceeds taxable income for the taxable year to which it is carried, is carried forward to the next earliest taxable year in chronological order until it is completely absorbed.

Under one of the exceptions found under Va. Code § 58.1-301, to Virginia's conformity to the IRC, Virginia does not allow the election of three-, four-, and five-year carryback periods for NOLDs generated in Taxable Years 2008 and 2009 permitted under IRC § 172(b)(1)(H). See Va. Code § 58.1-301 B 2. Accordingly, taxpayers who elect an extended carryback period for such NOLDs on their federal income tax returns must adjust their FAGI for Virginia income tax purposes, as if the carryback period for such NOLDs was limited to two years.

With the exception of the federal carryback election permitted under IRC § 172(b)(1)(H), Virginia allows federal NOLDs to be carried back for the same period as is allowed under the IRC. See Title 23 of the Virginia Administrative Code 10-110-84. Thus, in accordance with federal income tax law, Virginia retains the three-year carryback period for the portion of an individual's NOLD arising from casualty or theft.

CONCLUSION

Based on the specific facts of this case, it appears the Taxpayer's NOLD for Taxable Year 2009 arose from theft. Accordingly, the Taxpayer properly carried back the excess NOLD from Taxable Year 2009 to Taxable Year 2006. The Taxpayer's Taxable Year 2006 amended Virginia return should be processed as filed. The Department will process and review the Taxpayer's Taxable Year 2006 amended Virginia return and issue a refund, with applicable interest.

The Code of Virginia sections and regulation cited are available online in the Laws, Rules, and Decisions section of the Department's website, located at www.tax.virginia.gov . If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Policy Development Division, at ***.

Sincerely,

Craig M. Burns
Tax Commissioner